This week showed that deflation is definitely not of the radar. The Eurozone CPI rose 0.7% y-o-y, while US inflation came down to 1.1% in February from 1.6% the previous months. The CPI data shows that, even though, the economy is picking up the ongoing phase of deleveraging is keeping inflation down.
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Especially in the Euro zone, deflation seems not that far away, although wages are still rising.
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On Wednesday, Janet Yellen experienced her first Fed policy meeting as chairwoman of the Federal Reserve. The decision to further taper Fed bond buying was pretty much a non-event, but newbie Yellen did provide for some fireworks in the press conference afterwards. Her interpretation of ‘considerable time’, which is part of the March official statement by the FOMC, could be as short as six months. That was clearly different from what the markets were thinking as interest rates rose quite sharply and equities went down.
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Rate expectations, however, did not move all that much.
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More uncertainty came from emerging markets. The housing market, no longer explicitly targeted by the government with additional regulations it seems, is still pretty hot. All major cities, except for one, saw the average price of houses rise, once again, in February.
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Worries concerning the health of the property sector remain. Speculation that the government is loosening funding restrictions for property developers to support economic growth brought some relief.
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Meanwhile the yuan depreciated further. The Chinese currency has lost 3% of its value against the dollar since the middle of January. Where will this end?
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In case of Chinese equities the end has yet to come. Friday the markets went up quite a bit on the easing speculation but taking a longer horizon into account shows Chinese equities are in a multi-year bear market.
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Russia keeps making the headlines. Crimea has ‘voted’ and Russia is more than glad to complete the annexation of the former Russian region. Meanwhile Europe and the United States have announced new sanctions. The obvious conclusion, stay out of the Russian markets for now. We are not done yet.
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The new sanctions make it clear that the Crimea issue will hit Russian growth. Consensus GDP growth expectations were already coming down, but the chances have increased significantly that Russia will end up in a recession.
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Finally, as I type the week end blog, the S&P500 index has set a record, again…
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Until next week.
Jeroen Blokland Financial Markets Blog 
